I believe economists should pay more attention to "knowledge of counterfactuals" as a critical condition to Coasean bargains. This can be a problem in many cases where we'd like to pay for conservation, and I think is useful to distinguish from other "additionality" concerns.

But if I have the right (or set a tax), I will charge "too much" to smoke because of inframarginal units, and if my friend has the right to smoke, I cannot buy abatement from him since he can't credibly report how much he would have smoked counterfactually.

The basic problem is that I cannot credibly share the disutility smoking causes me, and my friend cannot credibly share how many cigarettes he would smoke absent bargaining. Since the efficient solution is probably some positive amount of smoking, we can't just trade the right to smoke at all.

Can Coase or Pigou stop my friend from smoking? Knowledge of counterfactuals is a critical component of Coasean bargaining, likely to fail in many simple settings.

My friend and I actively want to Coasean bargain over his smoking. Unfortunately, I believe this is impossible, and a problem that is more general in environmental economics! A short thread on my first Substack post...
Read the full post here:
andresdeloera.substack.com/p/can-coase-...